The
significance of the Bo Xilai case was not limited to its status as the
most serious leadership crisis in China in perhaps four decades. It also
revealed the power struggles that go on in Zhongnanhai and the level of
corruption that feeds the staggering wealth of China’s rulers. Recent
stories about the family riches of new Party Secretary Xi Jinping and
Premier Wen Jiabao show that Bo’s use of his official privilege to gain
wealth was not an aberration. Despite the public unity displayed by the
new Standing Committee, there are still factions within the Politburo.

The jockeying for power during Mr. Xi’s term is just beginning and a new
scandal similar to that which deposed Mr. Bo could divide the
leadership, not to mention cause significant social dissension. Nor is
it clear how the PLA leadership will respond to perceived weakness or
failures on the part of China’s leaders. How much it respects Mr. Xi and
is willing to follow his lead will only become clear over time, but it
certainly will expect him to protect China’s interests abroad and
prevent greater social instability at home.

2. Slowing economic growth.

China’s relentless
economic development has been the global success story of the past two
decades. After growing at around 10% a year for nearly 30 years, China’s economy has slowed down significantly
in 2012. Last quarter, growth dropped to 7.4%, partially due to
continued economic weakness in America and Europe. While most countries
would be thrilled with such a high growth rate, a sustained slowdown in
China’s development curve would have ripple effects throughout the
entire labor force. Not merely college-educated students would be
affected; millions of factory workers and those in rural areas would
also see their incomes decline. Given that a reported 180,000 protests
and uprisings occurred throughout China in 2010, a weak economy will
undoubtedly put severe stress on the country’s social and political
systems.

Waves of migration could increase both internally and to
nations in Asia, causing tension between settled residents and migrants,
and riots could occur in major cities. A populous already losing
confidence in the national leadership could try to force the change. At
the same time, China faces a significant provincial debt problem and a
growing property bubble in the country’s largest cities. A collapse of
either of these could have untold consequences for economic growth.

Finally, China is beginning to reap the fruits of its One Child Policy,
which will present the country with a significant demographic challenge
for the rest of this century. A shrinking labor pool and increased
pressure to provide basic social services will be a further drag on
economic growth in coming years.

3. Irresolvable territorial disputes.

For nearly a decade, China’s “smile diplomacy” garnered
it friends and admirers both in Asia and around the world. Beijing
seemed more nimble and more innovative than other countries, including
the United States and Japan. That generous foreign aid programs bought a
good deal of its influence did not detract from the fact that China had
become a major presence on the global diplomatic stage. However, its
assertive and overweening behavior in the East and South China Seas over
contested islets threatens not merely to derail China’s attempt to
become the most influential nation in Asia, but also edges the region
ever closer to outright conflict. Although the territorial disputes
themselves stretch back decades, the maritime standoffs have become more worrisome
in recent months.

The longer these go on, and the more connected they
are with nationalist demonstrations among all the claimants, the more
likely that miscalculation or an accident will spark an actual clash.
While it is hard to envision a full- fledged war breaking out over these
islands, the negative political and economic consequences of even a
minor armed clash are cause for concern. For China, the specter of
defiance by smaller nations has brought out an ugly assertiveness that
may indicate deeper unwillingness to abide by international norms that
do not comport with its aims. The result can only be a more unstable
Asia-Pacific, and a possibly aggressive China.

4. Environmental disasters in the making.

While this gets much less attention than the sour economic and political
news of the region, Mr. Xi and his colleagues must come to grips with
the country’s looming environmental crises. Major sources of drinking
water are declining rapidly; the threat of drought in
China’s Northwest increases exponentially with even minor rises in
temperature; the level of air pollution in China’s major cities is an
untenable public health hazard; and food safety concerns continue.

Not
only is the leadership at risk of public backlash over polluted skies
and waters, eventually the very real human toll of such governmental
neglect will prove a drain on economic growth and will be a source of
severe social tension.

5. No new ideas.

Perhaps of greatest concern is that Mr. Xi and his six colleagues that comprise the new Standing Committee
do not have records of pushing reforms and do not seem particularly
cosmopolitan. While it is unrealistic to expect the Communist Party to
elevate to senior positions anyone not totally loyal to it and its
control over the Chinese populace, it does need to find leaders with
ideas and solutions to all of the various problems listed above.

Unfortunately, Mr. Xi and his co-leaders are likely to come under
pressure from elites worried about protecting their parochial interests
and commoners angry at corruption and a declining standard of living. In
response, it remains unlikely that the new leaders will embrace any
type of meaningful reform for fear of losing political control (à la
Mikhail Gorbachev in the Soviet Union 25 years ago).

Given that
President Hu Jintao presided over a slowdown in the growth of the
private sector and a return to greater emphasis on state owned
enterprises, what ideas does Mr. Xi have for ensuring continued economic
growth or responding to citizens’ dissatisfaction with inefficient
local government rule and continuing repression?

What is Mr. Xi’s
strategy for dealing with China’s problems and what type of vision does
he have for the country over the next 10 or 25 years?

Should China’s new leadership merely muddle along for the next
decade, then the next turnover of power in 2022 may take place under
much more unsettled and less promising conditions. How will the PLA
respond to a China that is growing weaker on the world stage or one
whose goals are being frustrated by other nations? Will the leadership
stick together if growth continues to slow or debt loads increase such
that financial crises plague the nation in the coming years? These are
questions to which Western and Asian governments should be paying close
attention, and they should be figuring out which metrics are most
important for understanding China’s current trajectory.

Given the amount
of information coming out of the country regarding potential problems,
there is no excuse for being caught flat-footed or misinterpreting
current trends. With the level of economic integration between China and
the rest of the world, and the growing strength of China’s military,
any disruption, weakness, or collapse emanating from Beijing will have
profound repercussions across the globe.

1 comments:

Andrew
said...

China's high rate of economic growth is a classic example of "catch-up growth".

Nations at the technological frontier, like the US, can only create economic growth through innovation - new products and services, and most importantly new ways of delivering them that improve productivity. But innovation is hard. By definition you don't know for sure what is going to work or what people will want, so it is a process of experimentation. This requires reasonably free markets and a reasonably effective rule of law, so that it is possible for innovators to bring new ideas to market. Even then growth rates remain fairly low because not all the experiments will work.

But China started its economic growth from way behind the technological frontier. Instead of innovating, it only needed to import more modern technology and ways of working from elsewhere. This is easy because it's a matter of adopting what's already been proven to work. It can also be driven by an authoritarian government because it doesn't require freedom and experimentation.

Catch-up growth results in a temporary period of very high annual growth which gradually declines as the nation gets closer to the frontier. It's happened to many developing nations before. It even happened in West Germany in the 1950s, as they had to rebuild their industrial base almost from nothing after the devastation of WWII.

The question is whether China can successfully negotiate the difficult transition from a catch-up economy to an innovation-frontier economy.

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